Looming federal cuts big risk to small companies

NEW YORK — Laura Schoppe's small business gets about half of its revenue from contracts with the federal government. It's at risk of losing a chunk of that money when 2013 arrives.

Schoppe and thousands of other small companies with federal contracts are watching to see if Congress will stop a mandatory $109 billion in federal budget cuts scheduled to take effect Jan. 2 in what's being called sequestration. The cuts were triggered by the failure of Washington lawmakers to strike a budget deal that would begin chipping away at the U.S. deficit.

Unless Congress acts to stop the sequester, it's estimated that 9.4 percent of non-essential defense spending and 8.2 percent in non-essential spending in other parts of the federal budget will be reduced. No one knows yet where exactly the cuts might be made, but many expect they would have a devastating effect on small companies and slow an already lumbering economy. According to one study, the reductions could mean the loss of nearly 1 million small business jobs. In the meantime, small company owners are trying to find ways to soften any loss of revenue by prospecting for new business, cutting back on hiring and slashing spending.

Schoppe's company, Fuentek, helps federal laboratories license their technology innovations so they can be sold to companies for use in their own research and development. Most of the Raleigh, N.C., company's government contracts are with NASA and the Pentagon. It also works with universities.

"Our funding has a very real possibility of big cuts," Schoppe says.

She has talked with officials at NASA and met with her senator and congressional staffers to try to get a sense of how deep the cuts will be.

"The answer we're getting is, 'we're working hard not to make it happen,'" she says. "I'm sure they have plans, but they're holding it very close to the vest."

Schoppe says she believes Congress will find a way to avoid the cuts. But she's taking no chances and is looking for other business that will make her company less dependent on the government. One snag is that U.S. universities also face the possibility of big cuts in the money they get from the government. That could make them less able to develop and sell their own technologies. In the coming years, Schoppe's revenue could drop more. So she's soliciting business from overseas schools.

If she isn't able to bring in enough revenue to replace money lost to budget cuts, Schoppe says some of her staff of 30 would have to be furloughed until more business comes in.

Congress is in recess and isn't expected to debate or vote on sequestration until after the election. It's a thorny issue for small business owners because the planned cuts would coincide with tax increases scheduled to go into effect in January. The combination of steep budget cuts and higher taxes is being called the "fiscal cliff" because of warnings from some economists that it will send the country into recession. A bipartisan group of senators has been working on a plan to avert the cuts by creating a plan to reduce the federal deficit over the next 10 years — but the success of any proposal is uncertain given the sharp divisions in Congress.

The risk to small businesses and the economy could be severe. Small businesses would have to eliminate more than 956,000 jobs if all the cuts were implemented, according to researchers at George Mason University and the economic forecasting firm Chmura Economics and Analytics.

Their findings are based on what they believed would be the most vulnerable agencies. But it goes beyond the job losses likely to be suffered by companies with government contracts. It also includes businesses that benefit indirectly. For example, a company that provides cleaning or catering services to a government contractor might be one of the casualties when a contractor has to cut costs. Or a retailer that depends on a contractor's staffers for its business may have to lay off workers when sales fall.

"A lot of these companies don't know they're dependent on federal contracts," says Stephen Fuller, a professor of public policy at George Mason in Fairfax, Va.

Fuller says small businesses would account for nearly 52 percent of the job losses expected from companies. The study forecasts that more than 157,000 jobs at federal contractors would be lost. Nearly 800,000 would be lost at subcontractors, suppliers and the retailers, wholesalers and service providers who sell to contractors or their employees. The exact number of small business federal contractors in the country isn't known, but the Small Business Administration roughly estimates the number at more than 130,000.

Small businesses won't find out on Jan. 2 whether they're losing business. The agencies themselves may not know where they're going to make the cuts, Fuller says. But he has warned in testimony to Congress that small businesses are likely to suffer more than their larger counterparts from sequestration, partly because they have less access to financing and they have fewer products and services.

Many owners who belong to small business lobbying groups are staying in close touch with group leaders, trying to get any information they can about what might happen.

"Contractors are very seasoned business owners. They get the connection more than most business owners of what policy means to their bottom lines," says Barbara Kasof, president of Women Impacting Public Policy, a Washington, D.C.-based group that advocates for women and minority business owners.

"The uncertainty in general is very hard to cope with. How do you make your business plans? How do you hire?" she says.

Although companies across the country could suffer from budget cuts, areas where there are large government facilities or clusters of federal contractors are particularly vulnerable.

"The consequences of sequestration are amplified in North Carolina given our large military footprint and the economic importance of the defense contracting industry in our state," says Sen. Kay Hagan, a Democrat who met with Schoppe, the Fuentek CEO.

Many owners are already looking at how they can cut back their business.

"You try to lower your costs of doing business on a daily basis," says Catherine Giordano, owner of Knowledge Information Solutions in Virginia Beach, Va. About 85 percent of Giordano's business is with the government. She sells high-tech hardware such as computers, printers and photocopiers to federal agencies including the Pentagon, the General Services Administration and the National Institutes of Health. The company has been a government contractor for 10 years.

Giordano has no plans to add to her staff of 44 workers — down from 50 a year ago — and she's looking for cheaper space to rent for her offices. Sequestration would be yet another blow to already challenging times. Any cuts that come in 2013 would be on top of a 25 percent drop in revenue from the government that Giordano has suffered in the past year.

Federal contracts have been vulnerable to budget cuts over the years, even when the government's deficit wasn't seen as a crisis. The White House and Congress have routinely cut funding to some programs while boosting funding to others. Giordano says she's prospecting for new business from companies and colleges and universities.

Amber Peebles' company, Athena Construction Group, has been a contractor and subcontractor on federal construction projects since 2009. She gets 85 percent of her revenue from the government doing everything from carpentry work to helping build hospitals for the Veterans Administration. She and her co-owner, Melissa Schneider, founded the Dumfries, Va.-based company nine years ago. The former Marine was wounded during Operation Desert Storm in 1991, giving her company a special status that gives it preference in winning government contracts. It's also reducing her anxiety over sequestration. Even if Peebles loses some contracts, she expects that competitive advantage to position her company to win others.

"I could go crazy trying to second-guess and prepare for what we don't know," Peebles says.